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Why Netflix Stock Took a Dive Today

By Jeremy Bowman – Updated Oct 21, 2020 at 7:30AM

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The streaming stock slipped on a weaker-than-expected earnings report.

What happened

Shares of Netflix (NFLX 2.50%) were pulling back today after the streaming giant issued a disappointing earnings report last night, posting lower subscriber additions than it had projected and saying that subscriber growth would be down year over year through the first half of 2021.

As of 12:22 p.m. EDT on Wednesday, the stock was down 6.3%.

A Netflix menu featuring Stranger Things

Image source: Netflix.

So what

Netflix had already dialed down expectations for third-quarter subscriber growth, calling for just 2.5 million member additions after a blockbuster first half of the year driven by the lockdowns in the early months of the pandemic. But it delivered just 2.2 million new subscribers. Subscriber growth is the most closely watched metric for the company since it's the best indicator of the company's overall growth trends and is the most important component of revenue and profit growth.

The Asia-Pacific region was a bright spot in the period, adding 1 million new members, and management noted it has reached double-digit market penetration in South Korea and Japan, two key markets.

Elsewhere, revenue increased 22.7% to $6.44 billion, beating the company's own guidance and analyst estimates at $6.38 billion as revenue growth was helped by a better-than-expected plan mix in many of its geographies and a stronger euro and British pound. 

Further down the income statement, operating income increased 34% to $1.32 billion as profitability continues to benefit from a slowdown in production, though the company said production is now basically back up to full speed. Earnings per share on a generally accepted accounting principles (GAAP) basis rose from $1.47 to $1.74, missing expectations at $2.13, but the result included a $249 million loss on a foreign-exchange measurement of its euro-based debt. Without that, it would have topped estimates.

Now what

For the fourth quarter, Netflix guided to 6 million subscriber additions, down from the 8.8 million new subscribers it pulled in during the fourth quarter a year ago, as management still expects the pull-forward effect in the first half of the year to weigh on subscriber growth. Similarly, after it added nearly 26 million members in the first half of 2020, it expects growth to slow in the first half of next year.

It's understandable that Netflix shares are down after the latest report, especially as it missed what seemed like conservative guidance in the quarter. But the company still looks well positioned for long-term growth with a strong slate of content set to hit streams in the second half of next year after it recovers from the coronavirus, as well as promising signs of growth in Asia, the biggest market it operates in. Meanwhile, free cash flow is set to hit $2 billion this year, cooling off concerns about its debt burden.

Investors should expect more modest growth over the next few quarters, but the long-term thesis for the streaming stock is still intact.

Jeremy Bowman owns shares of Netflix. The Motley Fool owns shares of and recommends Netflix. The Motley Fool has a disclosure policy.

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